NOTE 9 – FAIR VALUE

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of the respective quarter ends, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each quarter end.

The Company determines the fair value of financial instruments using three levels of input:

Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date.

Level 2—Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Valuations are observed from unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at March 31, 2013 and December 31, 2012:

Cash and Cash Equivalents

The carrying amounts of cash and cash equivalents approximate their fair value.

Investment and Mortgage Related Securities—Available-for-Sale and Held-to-Maturity

Fair values for investment securities and mortgage related securities are obtained from one external pricing service (“primary pricing service”) as the provider of pricing on the investment portfolio on a quarterly basis. We generally obtain one quote per investment security. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. If quoted market prices are not available for comparable securities, fair value is based on quoted bids for the security or comparable securities. We review the estimates of fair value provided by the pricing service to determine if they are representative of fair value based upon our general knowledge of market conditions and relative changes in interest rates and the credit environment. The Company made no adjustments to the values obtained from the primary pricing service.

Loans Receivable, Net

To determine the fair values of loans that are not impaired, we employ discounted cash flow analyses that use interest rates and terms similar to those currently being offered to borrowers. We do not record loans at fair value on a recurring basis. We record fair value adjustments to loans on a nonrecurring basis to reflect full and partial charge-offs due to impairment. For impaired loans, we use a variety of techniques to measure fair value, such as using the current appraised value of the collateral, agreements of sale, discounting the contractual cash flows, and analyzing market data that we may adjust due to specific characteristics of the loan or collateral.

Federal Home Loan Bank Stock

The fair value of the Federal Home Loan Bank stock is assumed to equal its cost, since the stock is nonmarketable but redeemable at its par value.

Mortgage Servicing Rights

The fair value of the MSRs for these periods was determined using a third-party valuation model that calculates the present value of estimated future servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates.

Financial Assets Acquired from Debtors

The fair value of financial assets acquired from debtors was determined using valuations obtained from a third party valuation firm who utilized a discounted cash flow model to calculate the fair value of the assets. The discounted cash flow model includes significant unobservable inputs.

Accrued Interest Receivable and Accrued Interest Payable

The carrying amount of accrued interest receivable and accrued interest payable approximates fair value.

Deposit Liabilities

Fair values for demand deposits (including NOW accounts), savings and club accounts and money market deposits are, by definition, equal to the amount payable on demand at the reporting date. Fair values of fixed-maturity certificates of deposit, including brokered deposits, are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar instruments with similar maturities.

Short-term Borrowings, Federal Home Loan Bank Advances and Other Borrowed Funds

Fair value of short-term borrowings, Federal Home Loan Bank advances and other borrowed funds are estimated using discounted cash flow analyses, based on rates currently available to the Bank for advances with similar terms and remaining maturities.

Derivative Contracts

The fair values of derivative contracts are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when appropriate, the creditworthiness of the counterparties.

Off-Balance Sheet Financial Instruments

Fair value of commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms and present creditworthiness of the counterparties.

The estimated fair values of the Company’s financial instruments at March 31, 2013 and December 31, 2012 were as follows (In thousands):

		March 31, 2013				December 31, 2012
		(Unaudited)
	Fair Value			Estimated				Estimated
	Hierarchy	Carrying		Fair		Carrying		Fair
	Level	Amount		Value		Amount		Value

Financial assets:
Cash and cash equivalents	Level 1	$	5,873	$	5,873	$	25,090	$	25,090
Available for sale securities:
Investment securities available-for-sale	Level 2	12,542		12,542		12,491		12,491
Private label commercial mortgage related securities	Level 3	4,679		4,679		6,197		6,197
Agency residential mortgage related securities	Level 2	298,048		298,048		277,419		277,419
Held to maturity securities:
Agency mortgage related securities	Level 2	25,611		26,638		28,369		29,451
Loans receivable, net	Level 3	677,478		680,164		683,865		686,867
Federal Home Loan Bank stock	Level 3	9,707		9,707		8,097		8,097
Accrued interest receivable	Level 3	3,394		3,394		3,223		3,223
Mortgage servicing rights	Level 2	170		170		170		170
Financial assets acquired from debtors	Level 3	5,762		5,762		3,714		3,714

Financial liabilities:
Savings and club accounts	Level 2	98,421		98,421		99,046		99,046
Demand, NOW and money market deposits	Level 2	276,009		276,009		275,693		275,693
Brokered deposits	Level 2	69,106		69,192		50,637		50,715
Certificates of deposit	Level 2	253,400		255,229		262,033		264,694
Short-term borrowings	Level 2	29,700		29,700		70,500		70,500
Federal Home Loan Bank advances	Level 2	140,000		145,223		110,000		115,767
Other borrowed funds	Level 2	30,000		33,364		30,000		33,651
Accrued interest payable	Level 2	335		335		330		330
Derivative contracts	Level 2, 3	287		287		320		320

The following financial instruments were classified as Level 3 and carried at fair value as of March 31, 2013:

· Private label commercial mortgage related securities (“CMBS”), the fair value of which are difficult to determine because they are not actively traded in securities markets. The net unrealized gain in the private label CMBS portfolio was $49,000 and $78,000 at March 31, 2013 and December 31, 2012, respectively.

· Two loans, since lending credit risk is not an observable input for these commercial loans (see Note 4). The unrealized gain on the two loans was $264,000 at March 31, 2013 compared to $293,000 at December 31, 2012.

· Financial assets acquired from debtors, which are valued using a discounted cash flow model which contains significant unobservable inputs. Losses resulting from changes in fair value, totaling $241,000, for the three month period ended March 31, 2013, were recorded in assets acquired through foreclosure expense in the consolidated statements of operations.

· Credit derivatives are valued based on creditworthiness of the underlying borrower which is a significant unobservable input. The liability resulting from credit derivatives was $12,000 at March 31, 2013 and December 31, 2012.

The following measures were made on a recurring basis as of March 31, 2013 and December 31, 2012.

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
	As of		Assets		Inputs		Inputs
Description	March 31, 2013		(Level 1)		(Level 2)		(Level 3)
	(In Thousands, Unaudited)
Available for Sale Securities:
Obligations of U.S. government agencies	$	313	$	-	$	313	$	-
Corporate securities	12,229		-		12,229		-
Private label commercial mortgage related securities	4,679		-		-		4,679
Agency residential mortgage related securities	298,048		-		298,048		-
Loans (1)	2,751		-		-		2,751
Financial assets acquired from debtors	5,762		-		-		5,762
Derivative contracts (1)	(287)		-		(275)		(12		)
Total	$	323,495	$	-	$	310,315	$	13,180

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
	As of		Assets		Inputs		Inputs
Description	December 31, 2012		(Level 1)		(Level 2)		(Level 3)
	(In Thousands)
Available for Sale Securities:
Obligations of U.S. government agencies	$	314	$	-	$	314	$	-
Corporate securities	12,177		-		12,177		-
Private label commercial mortgage related securities	6,197		-		-		6,197
Agency residential mortgage related securities	277,419		-		277,419		-
Loans (1)	2,806		-		-		2,806
Financial assets acquired from debtors	3,714		-		-		3,714
Derivative contracts (1)	(320)		-		(308)		(12		)
Total	$	302,307	$	-	$	289,602	$	12,705

(1) Such financial instruments are recorded at fair value as further described in Note 4.

The following measures were made on a non-recurring basis as of March 31, 2013 and December 31, 2012:

Loans, which were partially charged off at March 31, 2013 and December 31, 2012. The loans’ fair values are based on Level 3 inputs, which are either an appraised value or a sales agreement, less costs to sell. These amounts do not include fully charged-off loans, because we carry fully charged-off loans at zero on our balance sheet.

MSR’s, the fair value was determined using a third-party valuation model that calculates the present value of estimated future servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds and discount rates.

Other real estate owned, we used Level 3 inputs, which consist of appraisals or agreements of sale. Other real estate owned is initially recorded on our balance sheet at fair value, net of costs to sell, when we obtain control of the property.

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
As of March 31, 2013 (Unaudited)			(In Thousands)
Loans	$	1,841	$	-	$	-	$	1,841
Mortgage servicing rights	170		-		170		-
Other real estate owned	5,830		-		-		5,830
Total	$	7,841	$	-	$	170	$	7,671

As of December 31, 2012
Loans	$	2,951	$	-	$	-	$	2,951
Mortgage servicing rights	170		-		170		-
Other real estate owned	4,810		-		-		4,810
Total	$	7,931	$	-	$	170	$	7,761

The following tables include a roll forward of the financial instruments which fair value is determined using Significant Other Unobservable Inputs (Level 3) for the periods of December 31, 2012 to March 31, 2013 and December 31, 2011 to March 31, 2012.

Three Months Ended March 31, 2013

	Private Label		Private Label
	Residential		Commercial						Financial
	Mortgage		Mortgage						Assets
	Related		Related			Derivative			Acquired
	Security		Securities			Contracts			from Debtors			Loans			Total
	(In thousands, Unaudited)

Beginning balance, December 31, 2012	$	-	$	6,197		$	(12	)	$	3,714		$	2,806		$	12,705
Purchases/additions	-		-			(2		)	1,994			-			1,992
Sales	-		-			-			-			-			-
Payments (received) made	-		(1,486		)	-			295			(26		)	(1,217		)
Premium amortization, net	-		(2		)	-			-			-			(2		)
Increase/(decrease) in value	-		(30		)	2			(241		)	(29		)	(298		)

Ending balance, March 31, 2013	$	-	$	4,679		$	(12	)	$	5,762		$	2,751		$	13,180

Three Months Ended March 31, 2012

	Private Label			Private Label
	Residential			Commercial					Financial
	Mortgage			Mortgage					Assets
	Related			Related			Derivative		Acquired
	Security			Securities			Contracts		from Debtors		Loans			Total
	(In thousands)

Beginning balance, December 31, 2011	$	122		$	8,906		$	-	$	-	$	2,877		$	11,905
Payments received	(5		)	(1,478		)	-		-		(11		)	(1,494		)
Premium amortization, net	-			4			-		-		-			4
Increase/(decrease) in value	20			(28		)	-		-		(44		)	(52		)

Ending balance, March 31, 2012	$	137		$	7,404		$	-	$	-	$	2,822		$	10,363

There were no transfers made between levels during the three months ended March 31, 2013 or 2012.